LN04 Beams33452115 12 LN04

Chapter 4
Consolidation
Techniques and
Procedures
Consolidation Techniques:
Objectives
1. Prepare consolidation workpaper for the
year of acquisition when the parent uses
the complete equity method to account for
its investment in a subsidiary.
2. Prepare a consolidation workpaper for the
years subsequent to acquisition.
3. Locate errors in a consolidation workpaper.
4. Record fair values to identifiable net assets
acquired.
Copyright 2015 Pearson Education, Inc. All rights reserved.
4-2
Objectives (continued)
5. Prepare a consolidated statement of cash
flows.
6. (Students) Create an electronic
spreadsheet to prepare a consolidation
workpaper
7. Appendix: Understand the alternative trial
balance consolidation workpaper format.
4-3
Consolidation Techniques and Procedures
1: ACQUISITION-YEAR
WORKPAPER
4-4
Preparing the Worksheet

Statements are entered onto the worksheet:
Income statement
Statement of retained earnings
Balance sheet
Columns needed:
Parent
Subsidiary
DR and CR columns for elimination entries
Consolidated
4-5
Completing the Worksheet (1 of 2)

1. Enter Parent and Sub. amounts at 100% of
book value. (Even if parent owns less)
2. Enter elimination entries into the DR and
CR columns. (Check totals)
3. For consolidated revenues, liabilities, and
equity (other than ending retained
earnings):
Add parent, subsidiary, less DR, plus CR
4. For consolidated assets:

Add parent, subsidiary, plus DR, less CR
4-6
Completing the Worksheet (2 of 2)

5. For income, ending retained earnings and
all subtotals and totals:
Compute directly in consolidated column.
Note:
The total consolidated assets should equal the
total consolidated liabilities and equity.
Expenses on the income statement and dividends
on the statement of retained earnings are
generally shown as negative numbers. So
compute the consolidated amounts as you would
for revenues.
4-7
Workpaper Entries
1. Adjust for errors & omissions
2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and
bring Investment account to its beginning
balance
4. Record noncontrolling interest in sub.'s
earnings & dividends
5. Eliminate reciprocal Investment & sub.'s equity
balances
6. Amortize fair value differentials
7. Eliminate other reciprocal balances
4-8
Example: Pep & Sap Data

Pep pays $176 for 80% of Sap on 1/1/2011
when Sap's equity consisted of $120 capital
stock and $60 retained earnings. All excess
was due to unrecorded patents with a 10year life.
Sap's income and dividends follow:
2011
2012
Net income
$50
$60
Dividends
$30
$30
4-9
Analysis
Cost of 80% of Sap
Implied value of Sap
($176/.80)
$176
Patents
$40
Amort.
10 yrs
180
$40
Amortization
Unamort.
Bal.
Amortization
Unamort. Bal.
on 1/1/2011
in 2011
on
12/31/2011
in 2012
on 12/31/2012
$40
$4
$36
$4
$32
Unamort. Bal.
Patents
Amt
$220
Book value (120+60)

Excess
Allocated to:
Use these amounts

in 2011 worksheet
for amortization
expense and
patents.
Use these amounts in

2012 worksheet for
amortization expense
and patents.
4-10
Income & Dividend Calculations

2011:
Sap's net income $50
Amortization
(4)
Adjusted income $46
Dividends
$30
2012:
Amortization
(4)
Adjusted income $56
Dividends
$30
Pep's 80% share

$36.8
$24.0
NCI 20% share
$9.2
$6.0
Pep's 80% share
$44.8
$24.0
NCI 20% share

$11.2
$6.0
4-11
Pep's 2011 Worksheet Entries (1 of 3)

none
none
3. Eliminate income & dividends from sub. and bring

Investment account to its beginning balance
Income from Sap (-R, -SE)
36.8
Dividends (+SE)
24.0
Investment in Sap (-A)
12.8
4-12
Pep 2011: Entries (2 of 3)

4. Record noncontrolling interest in sub.'s earnings &
dividends
Noncontrolling interest share (-SE)
9.2
Dividends (+SE)
6.0
Noncontrolling interest (+SE)
3.2

balances
Capital stock, Sap (-SE)
120
Retained earnings, Sap (beginning) (-SE)
60
Patents (+A)
40

176
44
4-13

6. Amortize fair value/book value differentials
Amortization Expense (E, -SE)
Patents (-A)
4
4
none
Note that in the last chapter, all worksheet entries

were prepared for the balance sheet. Here worksheet
entries are prepared for the income statement,
statement of retained earnings, and balance sheet.
4-14
Pep's 2011 Worksheet

Year ended 12/31/2011c
Pep
Sap
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
500.0
130.0
36.8
36.8
(400.0) (80.0)
Noncontrolling interest share

Net income/ Controlling
share
630.0
136.8
50.0
10.0
60.0
Add net income
136.8
50.0
Deduct dividends
(60.0) (30.0)
0.0
4.0
(484.0)
9.2
(9.2)
136.8
Statement of retained
earnings:
Beginning retained earnings
60.0
10.0
136.8
24.0
(60.0)
6.0
Ending retained earnings
86.8
80.0
86.8
4-15
Balance sheet, 12/31/2011:

Cash
Pep
Sap
DR
CR
Consol
78.0
20.0
98.0
Other current assets
180.0
100.0
280.0
Investment in Sap
188.8
12.8
0.0
176.0
Plant & equipment, net
500.0
140.0
Patents
680.0
40.0
4.0
36.0
Total
946.8
260.0
1,054.0
Liabilities
160.0
60.0
220.0
Capital stock
700.0
120.0
86.8
80.0
Retained earnings
Noncontrolling interest, Jan.1
700.0
86.8
44.0
Noncontrolling interest, Dec. 31

Total
120.0
3.2
946.8
260.0
47.2
1,054.0
4-16
A Look at the Income Statement

Pep
Sap
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
500.0
130.0
36.8
(400.0)
36.8
(80.0)

share
136.8
630.0
50.0
0.0
4.0
(484.0)
9.2
(9.2)
136.8
Income from Sap is eliminated.

Expenses are adjusted for 2011 amortization, - $4
on patents
Noncontrolling interest is proportional to Pep's
Income from Sap since Pep uses the equity
method.
$36.8 x .20/.80 = $9.2
4-17
A Look at Retained Earnings

Pep
Sap
DR
CR
Consol
earnings:
10.0
60.0
Add net income
136.8
50.0
Deduct dividends
(60.0) (30.0)
60.0
10.0
136.8
24.0
(60.0)
6.0
86.8
80.0
86.8
Beginning retained earnings of Sap is eliminated.

All of Sap's dividends are eliminated.
Net income is not calculated across the line, but
taken from the consolidated income statement.
Ending retained earnings is calculated in the
consolidated column.
4-18
A Look at Assets
Investment in Sap is eliminated.
Patents at the start of 2011 were $20, and current
amortization is $2; they are $18 at the end of 2011.
The total is calculated in the consolidated column.
Cash
Pep
78.0
180.0
Investment in Sap
188.8
Sap
DR
CR
20.0
Consol
98.0
100.0
280.0
12.8
0.0
176.0
500.0
140.0
Patents
Total
680.0
40.0
946.8
360.0
4.0
36.0
1,054.0
4-19
A Look at Liabilities & Equity

Sap's capital stock is eliminated.
Retained earnings are not calculated across the row; they
are taken from the statement of retained earnings.
Noncontrolling interest at year-end is proportional to
Pep's Investment in Sap account.
$94.4 x .20/.80 = $23.6
Pep
Sap
Liabilities
160.0
60.0
Capital stock
700.0
120.0
86.8
80.0
Retained earnings
CR
Consol
220.0
120.0
700.0
86.8
44.0

Total
DR
3.2
946.8
260.0
47.2
1,054.0
4-20
2: WORKPAPERS IN
SUBSEQUENT YEARS
4-21
Analysis, for 2012

Cost of 80% of Sap
$176
Allocated to:
Amt
Amort.
Implied value of Sap ($88/.80)
$220
Patents
$40
10 yrs
Book value (120+60)
180
Excess
Patents
$40
Unamort.
Bal.
Amortization
Unamort. Bal.
Amortization
Unamort.
Bal.
on
1/1/2011
in 2011
on 12/31/2011
in 2012
on
12/31/2012
$40
$4
$36
$24
$32
Use these amounts in

2011 worksheet for
amortization expense
and patents.
Use these amounts

in 2012 worksheet
for amortization
expense and
patents.
4-22
Income & Dividend Calculations

2011:
Sap's net income
Amortization
Adjusted income
$50
(4)
$46
Dividends
$30
2012:
Amortization
(4)
Adjusted income $56
Dividends
$30
Pep's 80% share

$36.8
$24.0
NCI 20% share
$9.2
$6.0
Pep's 80% share
$44.8
$24.0
NCI 20% share
$11.2
$6.0
4-23
Pep's Worksheet Entries for 2012 (1

of 3)
none
none
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Sap (-R, -SE)
44.8
Dividends (+SE)
24.0
20.8
4-24

dividends
11.2
Dividends (+SE)
6.0
5.2

balances
Capital stock, Sap (-SE)
120
Retained earnings, Sap (beginning) (-SE)
80
Patents (+A)
36

188.8
47.2
4-25
Eliminating Investment in Sap

Entry 5 eliminates the Investment in Sap and establishes the
Noncontrolling Interest as of the beginning of the current year.
Implied value of Sap at acquisition $176/.80
Add the increase in retained earnings from
acquisition to the beginning of the current year
$80 at 1/1/2012 minus $60 at 1/1/2011
Less amortization for all prior periods
$4 patent amortization for 2011
Adjusted value of Sap at 1/1/2012
$220
20
(4)
$236
Investment in Sap (80% x $236) = $188.8

Noncontrolling interest (20% x $236) = $47.2
Verify the $236 from the debits in Entry 5 (120 + 80 + 36).
4-26

6. Amortize fair value differentials
Amortization Expense (E, -SE)
Patents (-A)

Note payable Pep (-L)
Note receivable Sap (-A)
20
20
4-27
Pep's 2011 Worksheet

Year ended 12/31/2011
Pep
Sap
600.0
150.0
DR
CR
Consol
Income statement:
Revenues
Income from Sap
Expenses
44.8
(488.0)
44.8
(90.0)

Net income/ Controlling share
750.0
0.0
4.0
(582.0)
11.2
156.8
60.0
86.8
80.0
Add net income
156.8
60.0
Deduct dividends
(90.0)
(30.0)
(11.2)
156.8
Statement of retained earnings:

80.0
86.8
156.8
24.0
(90.0)
6.0
153.6
110.0
153.6
4-28
Pep
Sap
Cash
90.0
40.0
Note receivable Sap
20.0
194.0
Investment in Sap
209.6
DR
CR
Consol
130.0
20.0
140.0
0.0
334.0
20.8
0.0
188.8
480.0
120.0
Patents
Total
36.0
993.6
Note payable Pep

Liabilities
Capital stock
Retained earnings
20.0
140.0
790.0
153.6
120.0
32.0
1,096.0
20.0
50.0
190.0
120.0
700.0
110.0
153.6
47.2
4.0
300.0
Total
600.0
5.2
993.6
300.0
52.4
1,096.0
4-29
3: ERRORS IN THE
WORKPAPERS
4-30
Errors
Most errors show up when the consolidated
balance sheet does not balance.
Common omissions:
Noncontrolling interest share (income)
Goodwill
Noncontrolling interest (equity)
Check equality of DR and CR adjustments.

Verify totals for parent and subsidiary
statements.
Re-calculate the consolidated amounts.
4-31
4: ASSIGNING FAIR VALUE
4-32
Example with Excess Allocated

Pat pays $360 for 90% of Sol on 12/31/2011
when Sol's equity consisted of $200 capital stock
and $50 retained earnings. Inventory (sold in
2011), land, and buildings (20 years) were
undervalued by $10, $30, and $80, respectively.
Equipment (10 years) was overvalued by $20.
Sol's income and dividends for 2012 were $60
and $20.
At year-end, Sol has dividends payable of $10
which Pat has not yet recorded. There is $20 cash
in transit from Sol to Pat for the note.
4-33
Analysis at Acquisition
$36
0
Cost of 90% of Sol

Implied value of Sap ($360/.90)
$400
Book value (200+50)
250
Excess
$15
0
Allocated to:
Amt
Amort
Inventories
$10
1st yr
Land
30
Building
80 20 yrs
Equipment
Goodwill
Noncontrolling interest,
10%(400)
$40
Amortization
Unamort. Bal.
12/31/2011 *
in 2012 *
on 12/31/2012
$10
($10)
$0
Land
30
30
Building
80
(4)
76
(20)
(18)
50
50
$150
($12)
$138
Equipment
Goodwill
(20) 10 yrs
50
150
Unamort. Bal.
Inventories
* Use the
12/31/2011
and 2012
amortization
in worksheet
entries for
2012.
4-34
Sol's Income & Dividend

2012
Sol's net income
Amortization
$60
($12)
Adjusted
income
$48
Sol's dividends
$20
Pat's 90% share

$43.2
$18.0
NCI 10% share

$4.8
$2.0
4-35
Pat's Worksheet Entries (1 of 4)

Dividends receivable (+A)
9.0
Investment in Sol (-A)

Cash (+A)
9.0
20.0
Note receivable, Sol (-A)
20.0
none
3. Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Sol (-R, -SE)
43.2
Dividends (+SE)
18.0
25.2
4-36
Pat: Entries (2 of 4)
dividends
4.8
Dividends (+SE)
2.0
2.8
5a. Eliminate reciprocal Investment & sub.'s equity

balances (with unamortized excess)
Capital stock (-SE)
Retained earnings, Sol (beginning) (-SE)
Unamortized excess (+A)
200
50
150
360
40
4-37
5b. Allocate the unamortized excess
according to beginning-of-year balances.
Cost of Goods Sold (-SE)
10
Land (+A)
30
Building, net (+A)
80
Goodwill (+A)
50
Equipment, net (-A)

Unamortized excess (-A)
20
150
4-38
6. Amortize fair value/book value differentials
Operating (depreciation) expense (E, -SE)
Buildings, net (-A)

Equipment, net (-A)
4
2
Operating (depreciation) expense (-E,

SE)

Dividends payable (-L)
Dividends receivable (-A)
9.0
9.0
4-39
Pat's 2012 Worksheet

Year ended 12/31/2012
Pat
Sol
DR
CR
Consol
Income statement:
Revenues
Income from Sol
900.0
300.0
43.2
43.2
Cost of goods sold
(600.0)
(150.0)
Operating expenses
(190.0)
(90.0)

share
1,200.0
0.0
10.0
4.0
(760.0)
2.0
4.8
153.2
60.0
120.0
50.0
Add net income
153.2
60.0
(100.0)
(20.0)
(282.0)
(4.8)
153.2
earnings:
Deduct dividends
50.0
120.0
153.2
18.0
(100.0)
2.0
173.2
90.0
173.2
4-40
Pat
Sol
DR
CR
20.0
Consol
Cash
13.0
15.0
48.0
Accounts receivable, net
76.0
25.0
Note receivable Sol
20.0
Inventories
90.0
60.0
10.0
Land
60.0
30.0
30.0
Building, net
190.0
110.0
80.0
4.0
376.0
Equipment, net
150.0
120.0
2.0
20.0
252.0
Investment in Sol
394.2
9.0
0.0
101.0
20.0
0.0
10.0
150.0
120.0
25.2
360.0
Dividends receivable
9.0
Goodwill
50.0
Unamortized excess
150.0
Total
Accounts payable
993.2
360.0
120.0
60.0
Dividends payable
10.0
Capital stock
700.0
200.0
Retained earnings
173.2
90.0
9.0
0.0
50.0
150.0
0.0
1,097.0
180.0
9.0
1.0
200.0
700.0
173.2
40.0
4-41
5: CONSOLIDATED
STATEMENT OF CASH
FLOWS
4-42
Consolidated Cash Flows

The consolidated statement of cash flows is
prepared from:
Consolidated balance sheets, beginning & ending
Consolidated income statement
Other information
Procedure similar to an "unconsolidated"

statement of cash flows
Look at items specific to companies with:
Subsidiaries
Equity investments
4-43
Investing & Financing Cash Flows

Investing cash flows:
Include cash acquisition and/or disposition of
subsidiaries
Include cash acquisition and/or disposition of
equity investees
Financing cash flows:

Include cash dividends paid to noncontrolling
interests
4-44
Operating Cash Flows

Direct method:
Include cash dividends received from equity
investees (not equity method income)
Indirect method:
Start with controlling share of net income
Add the noncontrolling interest share
Deduct the excess of equity method income over
cash dividends received from equity investees
4-45
7: APPENDIX TRIAL
BALANCE FORMAT
4-46
Alternative (Trial Balance)

Worksheet Format
Worksheet format presented earlier used the
basic financial statements
Alternative uses the ADJUSTED trial balances
of the parent and subsidiary.
Columns on worksheet:
Parent and subsidiary adjusted trial balances,

DR and CR adjustments,
Income statement,
Statement of retained earnings, and
Balance sheet columns
4-47
Completing the Worksheet

1. Enter worksheet elimination entries into the DR
and CR columns.
2. Add accounts as needed (e.g., noncontrolling
interest, goodwill, noncontrolling interest share).
3. Carry consolidated balances to income statement,
retained earnings, or balance sheet columns, as
appropriate.
4. Move controlling share of income to the retained
earnings column.
5. Move ending retained earnings to the balance
sheet column.
4-48

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Chapter 4

Copyright 2015 Pearson Education, Inc. All rights reserved.

Copyright 2015 Pearson Education, Inc. All rights reserved.

Consolidation Techniques and Procedures

Copyright 2015 Pearson Education, Inc. All rights reserved.

Preparing the Worksheet

Copyright 2015 Pearson Education, Inc. All rights reserved.

Completing the Worksheet (1 of 2)

4. For consolidated assets:

Completing the Worksheet (2 of 2)

Example: Pep & Sap Data

Copyright 2015 Pearson Education, Inc. All rights reserved.

Book value (120+60)

Use these amounts

Use these amounts in

Income & Dividend Calculations

Copyright 2015 Pearson Education, Inc. All rights reserved.

Pep's 80% share

NCI 20% share

Pep's 2011 Worksheet Entries (1 of 3)

2. Eliminate intercompany profits and losses

3. Eliminate income & dividends from sub. and bring

Investment in Sap (-A)

Copyright 2015 Pearson Education, Inc. All rights reserved.

Pep 2011: Entries (2 of 3)

Noncontrolling interest share (-SE)

Noncontrolling interest (+SE)

5. Eliminate reciprocal Investment & sub.'s equity

Retained earnings, Sap (beginning) (-SE)

Investment in Sap (-A)

Pep 2011: Entries (3 of 3)

7. Eliminate other reciprocal balances

Note that in the last chapter, all worksheet entries

Copyright 2015 Pearson Education, Inc. All rights reserved.

Pep's 2011 Worksheet

Noncontrolling interest share

Add net income

Copyright 2015 Pearson Education, Inc. All rights reserved.

Balance sheet, 12/31/2011:

Other current assets

Copyright 2015 Pearson Education, Inc. All rights reserved.

Noncontrolling interest, Dec. 31

A Look at the Income Statement

Noncontrolling interest share

Income from Sap is eliminated.

Copyright 2015 Pearson Education, Inc. All rights reserved.

A Look at Retained Earnings

Add net income

Beginning retained earnings of Sap is eliminated.

Copyright 2015 Pearson Education, Inc. All rights reserved.

Other current assets

Copyright 2015 Pearson Education, Inc. All rights reserved.

A Look at Liabilities & Equity

Copyright 2015 Pearson Education, Inc. All rights reserved.

Noncontrolling interest, Dec. 31

Consolidation Techniques and Procedures

Copyright 2015 Pearson Education, Inc. All rights reserved.

Analysis, for 2012

Implied value of Sap ($88/.80)

Book value (120+60)

Use these amounts in

Use these amounts

Income & Dividend Calculations